SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the Quarter Ended Commission File Number
August 31, 1996 0-10665
SOFTECH, INC.
State of Incorporation IRS Employer Identification
Massachusetts 04-2453033
3260 EAGLE PARK DRIVE, N.E., GRAND RAPIDS, MICHIGAN 49505
Telephone (616) 957-2330
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
The number of shares outstanding of registrant's common stock at August 31, 1996
was 4,094,776 shares.
1
SOFTECH, INC.
INDEX
Page Number
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PART I. Financial Information
Item 1. Financial Statements
Consolidated Condensed Balance Sheets August 31, 1996
and May 31, 1996 3
Consolidated Condensed Statements of Income - Three
Months Ended August 31, 1996 and August 31, 1995 4
Consolidated Condensed Statements of Cash Flows - Three
Months Ended August 31, 1996 and August 31, 1995 5
Notes to Consolidated Condensed Financial Statements 6 - 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9 - 10
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K 11
2
PART I. FINANCIAL INFORMATION
SOFTECH, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
(dollars in thousands)
August 31, May 31,
1996 1996
---------- --------
ASSETS
Cash and cash equivalents $ 1,687 $ 3,017
Accounts receivable 3,503 3,211
Unbilled costs and fees 298 134
Inventory 426 341
Prepaid expenses and other assets 553 531
Net assets of discontinued operations (Note F) 7,913 7,523
----------------------
Total current assets 14,380 14,757
Property and equipment, net (Note E) 436 517
Goodwill 1,643 1,763
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TOTAL ASSETS $ 16,459 $ 17,037
======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 923 $ 862
Accrued expenses 577 550
Deferred maintenance revenue 579 668
----------------------
Total current liabilities 2,079 2,080
Stockholders' equity (Note E) 14,380 14,957
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 16,459 $ 17,037
======================
See accompanying notes to consolidated condensed financial statements.
3
SOFTECH, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
(in thousands, except for per share data)
Three Months Ended
-----------------------------------------
August 31, August 31,
1996 1995
---------- ----------
Revenue
Products $ 2,793 $ 2,405
Services 966 667
--------------------------
Total revenue 3,759 3,072
Cost of products sold 1,939 1,695
Cost of services provided 729 532
--------------------------
Gross margin 1,091 845
Selling, general and administrative 918 881
--------------------------
Income (loss) from continuing operations before taxes 173 (36)
Provision for federal and state income taxes -- --
--------------------------
Income (loss) from continuing operations 173 (36)
Discontinued operations (Notes B and F)
Loss from operations (750) (1,137)
--------------------------
Net loss $ (577) $ (1,173)
==========================
Income (loss) from continuing operations per common share $ 0.04 $ (0.01)
==========================
Net loss per common share $ (0.14) $ (0.29)
==========================
Weighted average common shares outstanding 4,094,776 4,056,733
See accompanying notes to consolidated financial statements.
4
SOFTECH, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Three Months Ended
---------------------------
August 31, August 31,
1996 1995
---------- ----------
Cash flows from operating activities:
Net loss $ (577) $ (1,173)
--------------------------
Adjustments to reconcile loss to net cash provided (used)
by operating activities:
Depreciation and amortization 184 179
Gain on sale of capital equipment (47) --
Deferred provision for income taxes -- 100
Change in current assets and liabilities:
Accounts receivable (292) 1,076
Unbilled costs and fees (164) 88
Inventory (85) 100
Prepaid expenses and other assets (22) 255
Accounts payable 61 (858)
Accrued expenses 27 (394)
Deferred maintenance revenue (89) 20
Net assets from discontinued operations (390) 1,249
--------------------------
Total adjustments (817) 1,815
--------------------------
Net cash provided (used) by operating activities (1,394) 642
--------------------------
Cash flows from investing activities:
Purchase of property and equipment, net (42) (24)
Proceeds from sale of capital equipment 106 --
Acquisition of businesses -- (11)
Other investing activities -- (7)
--------------------------
Net cash provided (used) by investing activities 64 (42)
--------------------------
Cash flows from financing activities:
Exercise of stock options -- 15
--------------------------
Net cash provided by financing activities -- 15
--------------------------
Net increase (decrease) in cash and cash equivalents (1,330) 615
Cash and cash equivalents, beginning of period 3,017 2,373
--------------------------
Cash and cash equivalents, end of period $ 1,687 $ 2,988
==========================
See accompanying notes to consolidated financial statements.
5
SOFTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(A) The consolidated condensed financial statements have been prepared
from the accounts of SofTech, Inc. and its wholly owned subsidiaries
(the "Company") without audit; however, in the opinion of management,
the information presented reflects all adjustments which are of a
normal recurring nature and elimination of intercompany transactions
which are necessary to present fairly the Company's financial position
and results of operations.
(B) The consolidated financial statements have been restated to reflect
the net assets and operating results of NSG as a discontinued
operation. The assets and liabilities of NSG have been reclassified in
the Consolidated in the Consolidated Condensed Balance Sheets as Net
assets of discontinued operations. The operating results of NSG and
Government Services Division ("GSD") are shown net of taxes in the
Consolidated Condensed Statements of Income as Loss from operations.
(C) Details of certain balance sheet captions are as follows:
August 31, May 31,
1996 1996
---------- --------
Property and equipment $ 979 $ 1,023
Accumulated depreciation and amortization 543 506
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Property and equipment, net $ 436 $ 517
=======================
Common stock, $.10 par value $ 454 $ 454
Capital in excess of par value 16,463 16,463
Retained earnings (1,055) (478)
Less treasury stock (1,482) (1,482)
-----------------------
Stockholders' equity $ 14,380 $ 14,957
=======================
(D) On September 12, 1996, the Company sold its Network Systems Group
("NSG") to Data Systems Network Corporation ("DSN"). The Company had
previously announced the signing of a letter of intent on June 18,
1996. Data Systems purchased certain assets and assumed certain
liabilities of NSG with a net book value on July 31, 1996 of
approximately $200,000 in exchange for $890,000 in cash and 540,000
shares of DSN common stock. The tangible assets acquired totaled
approximately $1.7 million and were primarily composed of fixed assets
and service inventory for maintaining the NSG installed base of
hardware and software. Liabilities assumed included deferred revenue
associated with maintenance contracts and other accrued expenses with
a total book value of about $1.5 million. The agreement provides for
dollar for dollar adjustment based on the net book value of the assets
as of the transaction date.
6
As is the custom in a transaction such as this, the Company remains
liable for certain breaches of representations made as part of the
sale of this Group to DSN as detailed in the Purchase Agreement filed
wiht the Form 8-K on September 23, 1996. In addition, the Company
remains liable as a guarantor for certain leases for NSG office space.
Revenue from discontinued operations for the three months ended August
31, 1996 and 1995 was $7,490,000 and $7,030,000, respectively.
At August 31, 1996 and May 31, 1996, the net assets of discontinued
operations, which are included in the Consolidated Condensed Balance
Sheets, are as follows:
August 31, May 31,
1996 1996
---------- --------
Accounts receivable (net) $ 7,801 $ 6,466
Unbilled costs and fees 437 686
Inventory 1,492 1,603
Prepaid expenses and other receivables 652 504
Fixed assets (net) 1,410 1,544
Other assets (net) 1,558 1,730
-------------------------
Total assets 13,350 12,533
Accounts payable 3,120 1,855
Accrued expenses 1,570 1,844
Deferred revenue 708 1,311
Deferred and accrued income taxes 38 --
-------------------------
Total liabilities 5,436 5,010
-------------------------
Net assets from discontinued operations $ 7,914 $ 7,523
=========================
(E) On September 20, 1995, the Company amended its Purchase Agreement with
the stockholders of Micro Control, Inc. ("Seller"). In consideration
for the Seller waiving their right to receive certain contingent
payments that may have been due if certain profit goals were attained
(see Note J and Management's Discussion and Analysis to the 1995
Annual Report which detail the potential liabilities) over the next
two years, the Company made a cash payment to them totaling $426,497.
The payment of $426,497 is composed of three separate items which are
as follows:
* $281,497 non-recoverable cash payment;
* an advance of $70,000 recoverable only against commissions earned
through the sale of the CAD Division; and
* a $75,000 cash payment for termination of the final two years of
the building lease at the Pennsylvania facility owned by a Family
Trust of which the Seller is a Trustee. In addition, a twelve
(12) month option to buy out the period from November 5, 1998 to
November 4, 2000 for an additional cash payment of $75,000 was
extended to the Company. This option was not exercised in
September 1996.
7
The non-recoverable cash payment and the lease buy out which total
$356,497 was expensed to operations in the second quarter of fiscal
1996. The commission advance was expensed in the fourth quarter of
fiscal 1996.
(F) On August 13, 1996, the Company's Board of Directors approved a
preliminary plan for distributing the proceeds from the NSG sale and
transitioning management and the Board of Directors ("Transition
Plan"). The preliminary plans for the distribution of the net proceeds
expected to be realized from the proposed sale of certain NSG assets
and the liquidation of the NSG balance sheet primarily involves the
collection of receivables, sale of the North Carolina facility and
payment of trade payables. The plan anticipates the accumulation of
the proceeds from the sale following the transaction, determination of
the amount to be distributed to the Company's stockholders,
establishment of a record date and completion of the distribution. It
is expected that this can be completed in calendar 1996. Sufficient
resources would be retained to fund the working capital needs of the
remaining CAD Division.
(G) On September 16, 1996, Norman Rasmussen retired as President and CEO
of SofTech, Inc. and the Board of Directors appointed Mark Sweetland
to those positions. Mr. Sweetland and Timothy Weatherford, a senior
manager in the remaining CAD Division, were elected to the Company's
Board of Directors. These actions were contemplated by the Transition
Plan and were part of the disclosure in Note L to the Consolidated
Financial Statements included in the Company's 1996 Form 10-K.
8
SOFTECH, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
On September 12, 1996 the Company completed the sale of its Network
Systems Group ("NSG"). An non-binding letter of intent had been signed with Data
Systems Network Corporation on June 18, 1996 as was previously announced. The
results of the NSG business have been presented as a discontinued operation. The
NSG assets and liabilities have been reclassified in the Consolidated Balance
Sheets as net assets of discontinued operations. The NSG operating results are
shown net of income taxes in the Consolidated Statements of Operations and
Retained Earnings under the caption "Discontinued operations". The analysis
below is directed primarily to the continuing operations. This treatment is
consistent with the presentation in the year end financials filed as part of the
Form 10-K submission for the year ended May 31, 1996.
Total revenue for the first quarter of fiscal 1997 was $3.8 million, an
increase of 22% from the $3.1 million generated in the first quarter of fiscal
1996. Revenue from the sale of products (hardware and software) was $2.8 million
for Q1'97, compared to $2.4 million for the first quarter of fiscal 1996, an
increase of 16%. Service revenue for Q1'97 was $966,000 and was $667,000 for the
first quarter of fiscal 1996, an increase of nearly 45%. Service revenue for the
first quarter of 1997 was 25.7% of total revenue, compared to 21.7% for the
comparative period in fiscal 1996.
Gross margin on products was 30.6% for the first quarter of fiscal 1997
compared to 29.5% for the first quarter of fiscal 1996. The Company would expect
to experience downward pressure on product margins in the near term. Gross
margin on service revenue was 24.5% in the first quarter of fiscal 1997 compared
to 20.2% for the same period in fiscal 1996. The improved service margins were
the result of the 45% increase in service revenue with only a 17% increase in
service payroll.
Selling, general and administrative expense for the first quarter of
fiscal 1997 was $918,000, an increase of 4.2% from the first quarter fiscal 1996
spending of $881,000. Selling expense increased nearly 25% in Q1'97 compared to
Q1'96 as a result of the 22% revenue increase and the 29% overall gross margin
increase. Salaries and commissions were responsible for most of that increase.
General & administrative expense decreased nearly 6% in Q1'97 compared to Q1'96
due primarily to headcount reductions.
Net income from continuing operations was $173,000 or $.04 per share
for the first quarter of fiscal 1997. The Company generated a loss of $36,000
from continuing operations in Q1 fiscal 1996, or $.01 per share.
The Company expects to be sheltered from most if not all federal tax in
the current year due to the first quarter loss and utilization of tax
carryforwards. State taxes are expected to be allocated primarily to
discontinued operations.
Through September 30, 1996, the core technology marketed by the Company
was an offering from Parametric Technology Corporation ("PTC"). Effective
October 1, 1996 the Company began marketing a new software offering from PTC
(see "Product Transition" in Company's 1996 Form 10-K filing).
9
Discontinued Operations
For the first quarter of fiscal 1997, the Company's NSG generated a
loss of $750,000 from operations, $.18 per share. For the same period in fiscal
1996 the loss from operations of NSG was more than $1.1 million, $.28 per share.
As previously noted, the sale of NSG was completed subsequent to the end of the
fiscal first quarter 1997.
As is the custom in a transaction such as this, the Company remains
liable for certain breaches of representations made as part of the sale of this
Group to DSN as detailed in the Purchase Agreement filed wiht the Form 8-K on
September 23, 1996. In addition, the Company remains liable as a guarantor for
certain leases for NSG office space.
Capital Resources and Liquidity
The Company ended the first quarter of fiscal 1997 with cash of about
$1.7 million, a decrease of approximately $1.3 million from fiscal year end
1996. The net loss adjusted for non-cash expenses such as goodwill and
depeciation was $440,000. An increase in receivables and inventory due to the
revenue increase utilized $541,000. An increase in net assets from discontinued
operations utilized $390,000 primarily due to an increase in accounts receivable
related to the NSG.
The Board of Directors approved a preliminary plan for the distribution
of the net proceeds expected to be realized from the sale of NSG and the
liquidation of the NSG balance sheet, see Note L to the 1996 Financial
Statements filed as part of the Form 10-K.
The Company believes that the cash remaining in the business following
the proposed distribution, together with the funds available under the line of
credit and cash generated from operations, will be sufficient to meet working
capital needs for at least the next twelve months.
10
PART II. OTHER INFORMATION
SOFTECH, INC. AND SUBSIDIARIES
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27(i) Financial Data Schedule as required to Article 5 of Regulation S-X.
(b) Reports on Form 8-K
The Company filed a Form 8-K with the Securities and Exchange Commission on
September 23, 1996 describing the disposition of its Network Systems Group
("NSG") to Data Systems Network Corporation ("DSN") on September 12, 1996.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SOFTECH, INC.
Date: October 15, 1996 /S/ Joseph P. Mullaney
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Joseph P. Mullaney
Vice President Chief Financial Officer
Date: October 15, 1996 /S/ Jan E. Yansak
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Jan E. Yansak
Controller